Webscale operators take their battle to space

Arun Menon / MTN Consulting

After spending billions for improved connectivity on land (data centres) and sea (submarine cables), top webscale network operators (WNOs) are now looking to conquer another frontier – outer space.

Earlier last month, Amazon announced plans to build a network of 3,000+ satellites in space to provide broadband internet connectivity. Dubbed “Project Kuiper”, Amazon’s satellite initiative seeks to provide high-speed, low-latency broadband internet connectivity to the unserved and underserved communities worldwide, by launching low Earth orbit satellites. Interestingly, Amazon’s newly announced ambitions created a lot of buzz in the media despite being a late entrant to the scene – Amazon’s webscale peers, Alphabet and Facebook, confirmed their plans to launch low-orbit satellites much earlier.

Google, before its mid-2015 name change to Alphabet, filed a patent way back in September 2014 (and published by US Patent Office in January 2017) detailing efforts to build a global-scale communication system with 1,000+ satellites. Facebook confirmed speculations of building its own internet satellite “Athena” in July 2018. Besides, Apple hired top satellite executives from Alphabet in April 2017, hinting its entry into satellite-based internet services. Another webscale operator, Microsoft, announced plans in 2017 to beam high-speed internet into rural America, though by different means – using unused television airwaves. Beyond the webscale space, several space technology companies have recently launched broadband-focused satellites into orbit, including SpaceX, Telesat and OneWeb.

More than just bridging the digital divide

One aim of these operators is to remove the digital barrier in unserved markets, but it is not the only goal. Space initiatives, such as launching communication satellites, require heavy investments in the form of capex to build equipment and related infrastructure. For non-traditional players such as WNOs, it becomes all the more important to acquire the complex underlying technical expertise and technology for space programs – and that is expensive. Fortunately, the key webscale players pushing satellite have a history of large network investments and high levels of free cash flow, as the below chart shows for 2018. These WNOs seem well placed to advance their satellite ambitions further in the coming years. 

Source: MTN Consulting, LLC

With the mammoth investments required for satellite, WNOs certainly expect benefits arising from their respective space pursuits to trickle down into earnings in the long term. In the short to medium run, WNOs look to reap rich dividends operationally. These include customer base expansion, operational flexibility and cross-selling opportunities – each explained below.

Customer base expansion

WNOs thrive on internet connectivity as most of their core businesses – retail, advertising, digital content, and cloud – require internet-based platforms to operate. With satellite-based internet services in unserved and underserved markets, WNOs such as Amazon, Facebook and others will be able to break into untapped markets and add new customers onto their platforms. Access to such huge potential markets could provide massive business opportunities and a much-needed thrust for these WNOs, as they look to cope with market saturation in many of their operating regions.

Operational flexibility

Better control and flexibility are other key benefits that could come with satellite-based internet delivery. As these satellite networks are (in general) exclusively owned by the respective WNOs, network vulnerability could be reduced, allowing them to control and secure the internet traffic better. Events such as a traffic hijack that disrupted Google services a few months back could be less likely to recur as WNOs gain autonomy over their satellite network infrastructure. More importantly, it could reduce WNOs’ dependence on the telcos. The big WNOs investing in satellite already have vast subsea network investments, and continue to build on this. Alphabet (Google) is building two private intercontinental subsea cable networks in the next two years. However, for wired connectivity to customers, WNOs rely heavily on local telcos. Satellite-based internet delivery could provide a way around the telcos in certain situations.

Cross-selling

As WNOs deploy their satellite networks, internet service delivery will be the main product initially. However, this could eventually become a platform to support their core businesses. And Amazon is exploring this option in a big way already.

Late last year, Amazon launched two wholly-owned satellite ground stations called “AWS Ground Station” and is planning to have additional 10 ground stations across different regions by mid-2019. The ground stations, all co-located with AWS data centres, will let customers connect with third-party satellites and send information to Amazon’s data centres for analysis, on an as-needed, pay-as-you-go basis. With the recent announcement of launching its own satellites in the orbit, Amazon can cross-sell its cloud and other services by leveraging its wholly-owned infrastructure. This business model could also pave the way for other WNOs, such as Google, Apple, and Facebook, which already operate data centres across locations and have satellite-based internet plans in pipeline.

Regulatory hurdle is high in the satellite market 

Deploying satellites though come with a major challenge for any operator – seeking regulatory approvals. All the satellite launches by the US companies, irrespective of their launch sites located anywhere in the world, are regulated by the US regulatory agency, the Federal Communications Commission (FCC). SpaceX’s road to approval at the FCC is illustrative of the agency’s importance – and the need to beef it up.

On April 27, SpaceX received approval from the FCC to deploy 1,500+ broadband satellites at a lower orbit than originally planned – SpaceX had earlier gained approval from FCC in November 2018 to launch 4,000+ satellites, but at a higher orbit.

With a long-term plan to deploy 12,000+ satellites into orbit, SpaceX has faced its share of hurdles to receive the necessary approvals. The FCC’s stated concern has been the risk of collisions with other satellites in similar orbits, along with the space debris left behind after mission completion. On the “orbital junk” issue, the FCC’s guidelines are dated – with compliance measures last updated in 2004. With all the new satellite investment coming, the FCC will need to revise its guidelines to address the impending risk. Unfortunately regulatory agencies are not known for moving fast.

Arun Menon is Lead Analyst at MTN Consulting

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